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Why Didn't We Know?

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A whistle-blower’s lawsuit alerts Galvatrens to deep flaws in its system for uncovering misconduct. How should management and the board respond?

HBR CASE STUDY

Why Didn’t We Know? by Ralph Hasson

COPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

It was 9:30 in the evening of what had been a very long Friday when the phone rang in Chip Brownlee’s home study. On the line was Arch Carter, the lead director of Galvatrens, the Houston-based consumer products company that Chip had led as chairman and CEO for the past ten years. “I just got your voice mail,” Arch said. “The parts about a lawsuit and accusations that we manipulated our sales numbers certainly got my attention. What’s going on?” “At this point, I don’t know much,” Chip responded, “but I wanted to give you a heads-up. A former divisional sales manager has filed a lawsuit against the company, charging he was wrongfully terminated because he tried to report an illegal scheme to inflate sales.” Chip had received a copy of the lawsuit that afternoon. As he’d read through the complaint, he’d gotten a whole new perspective on the multiple departures that had rocked Sales dur-

ing the past four weeks. The plaintiff was Mike Fields, who had left Galvatrens three weeks earlier. He claimed that he’d come across a plan devised by Greg Wilson, another divisional sales manager. According to Mike, Greg had proposed shipping goods to a few of his bigger customers, billing them, and booking the sales— but with a side agreement that they wouldn’t have to take ownership, could return the shipments at any time, and would get a 2% discount on any goods they accepted and paid for in the following quarter. The purpose of the channelstuffing scheme was to meet quarterly sales targets and trigger bonuses, Mike contended. “So what’s the wrongful termination charge about?” Arch asked. “Mike says he

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